Since the start of the financial crisis, industrial country public debt levels have increased dramatically. And they are set to continue rising for the foreseeable future. A number of countries face the prospect of large and rising future costs related to the ageing of their populations. In this paper, we examine what current fiscal policy and expected future age-related spending imply for the path of debt/GDP ratios over the next several decades. Our projections of public debt ratios lead us to conclude that the path pursued by fiscal authorities in a number of industrial countries is unsustainable. Drastic measures are necessary to check the rapid growth of current and future liabilities of governments and reduce their adverse consequences for long-term growth and monetary stability.

Public debt/GDP projections

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

15 Responses to “BIS: The Future of Public Debt”

Federal Reserve Chairman Ben Bernanke said Wednesday that huge U.S. budget deficits threaten the nation’s long-term economic health and should be addressed soon.

Obama administration officials have argued that the economy, while improving, is still too weak to bear all the new taxes and spending cuts that would come with an aggressive deficit-reduction campaign. In remarks to the Dallas Chamber of Commerce Wednesday, Mr. Bernanke agreed, but said merely articulating a plan for reducing the deficit in the long run would help the economy now.

Easy stuff for the U.S. of A.:
Raise/restore taxes on the wealthiest 10% of taxpayers with an eye toward net worth, not just earned income (if they don’t like it, they can invest in North Korea.)
Go to a single payer health care system (Medicare for all.) Make it outcome driven and wring out the 55% of cost that is not improving care.
Legalize all aliens with amnesty limited to illegal entry only (felonies here or in country of origin are grounds for deportation.) Then create an orderly legal entry program for the millions of young, hard-working people who want to be our future citizens and taxpayers.

The fiscal capability of each country is presumably taken into account by showing it as a % of GDP. The big issue is the political capability of each country to make the spending cuts and tax increases. To deal with something that is over 100% of GDP you must use both tools to a fairly drastic degree. There the US with its dysfunctional democracy is at a clear disadvantage. We seem unable to institute meaningful spending cuts or meaningful tax increases. So in the long run it will have to be solved by letting inflation run rampant until the national debt can be payed back with one big green piece of paper (worth about 2 loafs of bred). A shame because it will hurt the people who are saving rather than spending.

@super_trooper: No, the paper is using post-crisis, 2011 projected budgets, as the baseline.

The debt already accumulated, the increasing cost of maintaining it (see the FT link above), plus the unfunded liabilities, are the big problems. Although the paper is warning about certain unpleasant scenarios, the main message is constructive — while inflation expectations are low, take advantage of it, and keep them there. From the paper,

“So far the build-up of public debt in industrial countries has taken place against the backdrop of an exceedingly low interest rate environment. [that is unlikely to continue] … Although the chance of a government being forced to monetise its debt is rather remote in the short run, the chance that it could do so in the future is not insignificant. Therefore, the risk that long-term inflation expectations could suddenly become unanchored today is a possibility that should not be discounted.”

[...] piece of data in the argument that “if a path can not be sustained, it won’t be.” The Future of Public Debt shows that public debt as a fraction of GDP for many industrialized nations is growing and will [...]

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Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

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